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Democrats Gaining Ground in Midterms Wouldn’t Be Bad News for Banks

(Bloomberg) -- With Democrats likely to take control of the U.S. House in midterm elections, analysts expect some near-term pressure on bank stocks but say it won’t be all bad news.

Representative Maxine Waters (D-Calif.) at the helm of the Financial Services Committee might seek to return attention to Wells Fargo & Co.’s misdeeds. Some also expect fresh calls to break up the biggest banks. Even so, most market watchers anticipate President Donald Trump’s efforts to ease bank rules will continue, as his regulators are firmly in place.

That’s good for banks, which have outperformed the broader market since Trump’s 2016 election victory. It may not be enough to boost their stocks, as easier rules, tax cuts and fiscal spending may already be priced in. Still, Veda Partners’ Henrietta Treyz said the very passing of the election itself will eliminate uncertainty and could help shares rise.

Republicans are forecast to retain control of the Senate. Cowen’s Jaret Seiberg wrote that gridlock in Congress would mean bank regulators continue “to advance proposals to moderate the existing regime.” That’s why Cowen is still “overall positive” on the sector from a policy perspective, especially for regional banks. The risk for big banks, Seiberg said, “remains tied to populist anger.”

Capital Alpha’s Ian Katz is skeptical a Democratic House could change much, as long as the Senate stays Republican. Waters at the Financial Services Committee could ask for hearings on Wells Fargo, Equifax Inc. and Deutsche Bank AG’s financial ties to President Trump, but “the House alone won’t be able to follow through.”

Katz added that a close look at the House races shows a large percentage of the 2019 freshman class may be centrists -- not “‘let’s-blow-up-the-place’ Socialists.”

Compass Point’s Isaac Boltansky expects “a legislative logjam" with a divided Congress, along with “a forceful oversight agenda in the House, a steady pace of confirmations in the Senate, and a slow lurch from deadline to deadline on Capitol Hill.”

Whichever way the House goes, Boltansky sees little chance for overhauling the mortgage finance system, though there may be a chance for administrative change at Fannie Mae and Freddie Mac.

The Trump administration “has already engaged the regulatory gears,” with Trump appointees controlling nine of 10 key agencies, Height Capital Markets’ Ed Groshans said in an email. A Democratic majority House might create “headline risks” for large institutions like JPMorgan, Goldman Sachs, Morgan Stanley, Capital One and U.S. Bancorp due to hearings, but any House-passed legislation would likely die in a Republican Senate.

If Republicans retain control of the House and Senate, Groshans said large financial institutions would benefit from perceptions Republicans are more sympathetic to big banks. On the flip side, a “Blue Wave” would trigger investor fears Democrats are less sympathetic. But, there’s little real policy risk for the sector even under a Democratic sweep, he said.

If Republicans hold the House, the most significant consequence may be further presidential criticism of the Federal Reserve, Redburn’s Melissa Kidd and Clemmie Elwes wrote in a note. They think that could push the Fed to opt for more tightening, forcing banks to struggle to optimize the benefits of higher rates while curbing the impact on credit and deposit costs.